Question

Suppose that americans decide to increase their saving. if the elasticity of u.s. net capital outflow with respect to the real interest rate is very high, this increase in private saving will have a effect on u.s. domestic investment.

Answer 1

Answer: 1. Fall, increase ; 2. Large ; 3. Small.

Explanation:

Here is the complete question:

1. Suppose that Americans decide to increase their saving. As a result, the real interest rate will (Rise/Fall) , and U.S. net capital outflow will (Increase/Decrease) .

2. If the elasticity of U.S. net capital outflow with respect to the real interest rate is very low, this increase in private saving will have a (Large/Small) effect on U.S. domestic investment.

3. If the elasticity of U.S. exports with respect to the real exchange rate is very high, this increase in private saving will have a (Large/Small) effect on the U.S. real exchange rate.

1. In a situation whereby Americans decide to increase their savings, it will result in the fall in the real interest rate and also the United States net capital outflow will increase. A higher propensity to save will lead to an increase in the supply of funds and thefore reduces the interest rate.

2. If the elasticity of the United States net capital outflow with respect to real interest rate is very low, therefore, this increase in private saving will result in a large effect on the United States domestic investment.

This is because when the elasticity is low, there won't be much of capital outflow and hence, most of the capital can be utilized for domestic investment.

3. If the elasticity of the United States exports with respect to real exchange rate is very high, therefore, the increase in the private saving will lead to a small impact on the United States real exchange rate.